Why Does Title Insurance Get a Bad Rap?

Title Insurance vs. Homeowner Insurance Policies

While owner’s title insurance is optional to a homebuyer, we rarely hear homebuyers bemoan the fact that they are required to obtain homeowner’s insurance. The cost of owner’s title insurance premium paid by homebuyers to cover a hypothetical property costs $1,000 as a one-time premium without a deductible, while homeowner’s insurance would cost that same homebuyer $879 annually with a $500 deductible.

In other words, over a ten-year period of homeownership, that same homebuyer/homeowner would pay $962 for owner’s title insurance but pay $8,790 for homeowner’s insurance. Yet, rarely do we hear complaints about the required homeowner’s insurance coverage.

But why?

Here are the stats that give rise to the negative chatter over owner’s title insurance:

According to the Insurance Information Institute, six-percent of insured homes had a claim against the homeowner’s insurance policy compared to less than 1 percent of title insurance policy holders.  In an average year, the homeowner’s insurance industry paid out roughly $0.87 for every $1 in premium; whereas, the title insurance industry paid out only $0.05 for every $1 in premium.

These statistics on their face – without an understanding of title insurance as a "risk elimination" line of indemnity insurance – raise eyebrows.

Further, these statistics would lead one to assume that the title insurance industry is a far more profitable industry than the homeowner’s insurance industry when, in fact, the opposite is true. As of 2008, the top three title insurance underwriters lost money while the top three homeowner’s insurance companies were profitable.

Title insurance is not homeowner’s insurance

Title insurance is about "risk elimination" of title problems arising from past events and not "risk assumption" of future events.

According to the American Land Title Association, 25% of properties have a title defect that requires clearing and curing title prior to closing and, in most cases, this work is performed and cured without the parties to the transaction ever knowing about it.

The cost for this work is paid with title insurance premiums; both to the title agent in the form of commissions and to third-party service providers for reviewing and clearing title. Title insurance premiums also pay for the cost of maintaining accuracy of title plants and other title records.

So, in addition to paying out claims for human error or fraud by a seller or prior homeowner, the title insurance premium also covers work performed for eliminating the risk of a title defect.

Before the advent of title insurance, homebuyers hired and paid attorneys to review title, cure title, and issue an attorney’s opinion title. If the attorney erred, the homeowner could make a claim against the attorney – assuming the attorney had not since been disbarred for malpractice.

In this modern world, the homeowner has the option of purchasing owner’s title insurance for which they can rely on the title insurance underwriter (or, in the event of a defalcation or bankruptcy, it’s regulating state insurance commission) to make good on a claim.

Who Benefits:

Title insurance services offer a wide range of protection to the many different parties who have various interests in real estate transactions. The benefits of title insurance protect:

• Real Estate purchasers

• Sellers

• Lenders

• Real Estate Brokers

• Attorneys

• Homebuilders

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